Friday, June 19, 2009

Markets and Health Care

It's not at all clear what the "best" solution to the current health care problem is. Of course, if the market were competitive and well-functioning, the "most efficient" thing to do would be to just price it and let people choose whether or not they want it.

Sounds great, but that's problematic. People choosing whether or not to get health insurance might know somewhat more about their own health histories than the insurer does, and try to game the system. People who think they're healthy might try to go without health insurance, or maybe alternate their decision so that they get it one year and not the next and so on. (In fact, a lot of people do this with the optional vision or dental coverage in their current health plans.) This gaming of the system by "healthy" people would drive up the price of insurance for regular subscribers because the insurer would know that those people are less healthy on average (or have an informed guess to that effect). That's why as a compulsory subscriber to a group plan most folks "pay" (between themselves and the portion that their employers pay) about $10,000 for insurance, whereas the on the individual market prices run about 15,000. Also, when "healthy" non-subscribers get "unlucky" (which some inevitably will) their reliance on urgent care drives the costs up even more for everyone, including subscribers.Thus, since there is incomplete information, adverse selection, etc., markets don't do the job all that well.

The employer-based system we have now is pretty good, in the sense that it resolves most of the adverse-selection problem by pooling subscribers according to something roughly independent of the quality of their health (i.e. subscribing everyone according to where they work rather than whether they voluntarily enter the insurance market). This does reduce costs, but this system is flawed, too. It distorts labor markets (giving some firms an incentive to move operations to Canada, Mexico, or Asia) because health benefits can comprise up to 30% of the labor cost for some lower-skill occupations. Not only that, but if you can only find part-time work or lose your job, you become uninsured, too (or face the higher prices of the private insurance market discussed above). Mandates might resolve this (we do this for auto insurance, by the way), but people are afraid of this option because some folks are likely to not be able to afford the cost.

That sort of brings us to the current debate, which is more about income distribution than anything else. It represents the classic trade-off between equity and efficiency in drawing up economic policy. It also brings the issue of "public goods" and "merit goods" into the debate. While there is little argument that health care is really a "public good," it may be a "merit good." I'll think about the distributional effects of "reform" tomorrow.

Thursday, June 18, 2009

Trust the Producer?

Even in well-functioning, reasonably competitive markets, I cannot think of an economist who would simply say "trust the producer to tell you how much should be consumed and at what price." I don't walk into Walmart and say "tell me what I need this week and we'll pay for it," and neither do most people. But that is exactly the argument some people make about health care. With this propaganda coming out, no wonder prices are so high!
Point 1: The market for health care is one that is inherently prone to imperfect information. In some ways, patients know more about their health and their habits, but doctors know more about their diagnosis and treatment. In fact, doctors specialize in knowing more about things that are wrong with you, so we really don't wand to correct the problem by making patients 100% informed (that would be prohibitively costly). There needs to be some sort of external regulator here.
Point 2: Health care is already rationed by bureaucrats, and we wouldn't have it any other way. Private insurance has armies of bureaucrats that determine what types of procedures and what costs will be approved for your care, not your doctor. If they didn't do this, you wouldn't be able to afford health care.
Point 3: Lots of people have public insurance already, and actually prefer it to being thrown out on the market for private insurance. Most people who are eligible for Medicare, VA benefits, or TriCare (and do not have any employer-provided benefits) happily take these benefits. Even the bureaucracy doesn't seem to bother them that much. In fact a lot of the most expensive patients in the system are already paid for using tax dollars.
Point 4: Private insurance is much more costly per person than being part of a group plan because insurees in the private individual market are adversely selected. Mostly sick people choose to be insured in this corner of the market. Healthy people in this part of the market who don't have insurance sometimes get very unlucky all of a sudden, and their urgent-care costs drive up costs for others.
Point 5: Private insurance premiums are not "actuarially fair" in economic terms. In other words, the premium i pay them exceeds the total expected cost of providing care over the entire pool of insurees. In other words, insurance companies make "economic profit," which should be distinguished from "accounting profit," or "proprietors' income."
I'm not sure if single-payer is the way to go, but the total net cost probably won't go up too much. If you think of the labor cost your employer pays in health insurance as wages you're not getting, it's outrageous! Between my employer and myself, I already pay about $10,000 per year! If that money simply shifted from my BC/BS to the government, and I got a comparable level of care, what does it matter? Bottom line: it's not patients and doctors who decide things now. Bureaucrats already decide and will continue to do so regardless.